General Contractors’ Role Shifts

D.J. Belser, a field engineer with construction firm DeAngelis Diamond, works onsite at the LeeSar expansion and renovation in Fort Myers, Fla. DeAngelis established a healthcare group seven years ago, and the firm is aiming for seniors housing construction to account for 25 percent of the company’s portfolio over the next few years.

A growing number of construction firms are operating more like strategic partners rather than simply building product for their clients.

By Lynn Peisner

The construction industry is growing both more essential and more understaffed every year. This unhealthy combination has many general contractors stretched thin and a lot of developers backing away from projects simply due to a lack of qualified workers who know how to build seniors housing. Also, as a result of less skilled labor, construction costs are more likely to run prohibitively high.

Construction managers are rising to meet increasing demands by widening their business perspective and resorting to more big-picture thinking about how the seniors housing market will grow in the coming years and how they can tailor their business models to meet that growth.

For example, construction managers are being treated more as partners and less as vendors so they can streamline operations, deliberately and carefully assign staff and subcontractors, and ensure the finished product meets an owner’s needs.

“Our role in leading seniors housing into the future is to stay ahead of the trends,” says Andrew Fisher, director of business development for The Weitz Company. “We need to understand the key issues of our clients and what they’re facing so that we can be a sensitive, long-term partner. There’s a lot of conversation about what the demands will look like in 10 to 20 years. We are preparing for that market today.”

According to Marcus & Millichap’s national report on seniors housing for the second half of 2016, persons 65 years of age and older will account for more than 20 percent of the total U.S. population over the next 10 years.

But the housing that seniors of tomorrow will want is likely to be quite different from the communities that are being built today.

Staying ahead of the curve

The Weitz Company is a national general contractor headquartered in Des Moines, Iowa. The company has built more than $3 billion in senior living construction projects. Its body of work includes nearly 31,000 units of independent living, assisted living, skilled nursing, memory care and villa/cottage homes combined in 33 states.

Weitz leaders are closely following seniors development and demographic trends to ensure the 162-year-old company stays as relevant tomorrow as it was in the 19th century.

“Many people are staying in their homes longer and only move when they have to," says Larry Graeve, a senior vice president at Weitz. “The average age of move-ins is 83, so the need for assistance will be great, but they will want it to look like independent living."

Graeve says that this anticipated preference is leading some owners to look into a model sometimes called “independent living light,” a community that resembles an apartment complex but includes services. A typical independent living unit measures approximately 1,500 square feet, while an assisted unit is around 900 square feet.

“The problem is, those larger units may not be affordable for a majority of seniors,” says Graeve. The Baby Boomers are likely to have less to spend than the generation that is currently living in seniors housing.

According to Housing in America: The Baby Boomers Turn 65, a report authored by John McIlwain and published by the Urban Land Institute, “the leading-edge boomers will have better health and more energy than even the Silent and Greatest generations, and they can expect an even longer life. In contrast, they have less [money] saved for retirement and a greater debt load than the two generations preceding them. Only some of them have the funds to retire comfortably for the long lives ahead of them.”

Graeve sums up the burning question of the day regarding seniors housing construction this way: “How are we going to provide a product seniors can afford to move into, particularly when we’ve currently got a crisis with the labor shortage and price escalation?”

Seniors Housing Business asked many professionals active in the development and construction business how they’re thinking about this question and what other subjects are on their minds.

Tracking construction starts

The bellwether of the construction industry, The Dodge 2017 Construction Outlook, reports that new starts for all construction in the United States will increase 5 percent to $713 billion. The report also states that the multifamily boom may have flatlined, leaving several owners and contractors speculating that this easing of activity in the apartment sector will likely send more construction workers toward seniors housing.

“We’re seeing a slowdown in multifamily construction,” says Matt Booma, executive vice president of CA Senior Living, a division of Chicago-based CA Ventures. “As that cycle gets a little longer in the tooth, we’ll see it stabilize and move off a high-growth footing and into a maintenance footing. That pool of labor now becomes available for other work, and we hope that seniors housing will see the benefit of that.”

Frank Muraca, president and senior planner with Lincolnshire, Ill.-based Arch Consultants, a third-party developer and consultant with a little more than $500 million of projects either under construction or in various planning stages primarily in seniors housing, says he expects a 10 percent increase in volume in his shop this year.

Muraca anticipates the same growth next year.

While Muraca’s projections are double that of the Dodge figures, he says forecasting construction activity isn’t a perfect science.

“For the short term, it’s my belief that construction activity will remain on the rise for at least the next couple of years,” he says. “One of the indications of continued growth will be how much planning we see happen later this year and next that will feed construction activity in 2018 and 2019.”

While certain markets in Florida, Texas or Georgia are experiencing an oversupply of seniors housing, many in the field say tertiary markets will see a surge in construction activity.

“We’re beginning to reach a saturation point in primary and secondary markets,” says Muraca. “So a lot of people are looking at tertiary markets for independent living, assisted living and memory care moving forward.”

CA Senior Living tends to select high-barrier-to-entry markets.

“The most important thing we think about is that this is a very local business,” explains Booma. “People are not driving four hours to go to a senior living community. They’re finding something in their neighborhood. So you have to look carefully at each market and answer the question: Are we on the side of town that is overbuilt?”

“It’s important in telling the supply story of new construction and deliveries to also tell the demand side of the story,” says Mace. “Demand in many markets is fairly strong, but it tends to not be enough to satisfy all the supply that is coming into those markets. As a result, some occupancy rates have declined in the past 12 months.”

NIC tracks 31 major metros to monitor new starts (defined as the point at which a developer breaks ground on a project). For the four quarters that ended March 31 of this year, new assisted living starts totaled 11,176 units. One year ago, that number was 15,507, and in 2015, that number was 12,565.

New starts for independent living totaled 7,190 units over the four-quarter period that ended March 31, down from 7,751 in 2016 and 7,533 in 2015. These numbers are preliminary. Due to the nature of construction starts and how they are reported, the figures may be revised over time.

“My take on the market right now is that it’s a tale of many markets,” says Mace. “Some West Coast markets such as San Jose are not experiencing a lot of development because of barriers to entry; there are a lot of competing uses for land, and development activity has been slow. The flip side of that is Atlanta or Houston, where there is a lot of construction underway.”

Belaboring the labor issue

It’s a subject that’s been covered many times, but it bears repeating: skilled construction labor is getting harder to find each year.

“A lot of developers, owners and operators are looking to mitigate risk by being acutely aware of who the subcontractors are who are appropriate for a project,” says Muraca. “They are starting to identify them sooner in the process versus later. We never had to worry about that before. There were always enough qualified subcontractors. You would let the general contractor worry about it. Now, you need to have that on your radar screen just so you can minimize the risk when you get to construction.”

DeAngelis Diamond, a Naples, Fla.-based construction firm, is building Avida Senior Living, a 488,265-square-foot, $95 million assisted living, memory care and independent living community in Fort Myers. Quadrum Global is the developer of the project.

Craig Bryant, senior project manager for DeAngelis Diamond, says rising construction costs and a lack of skilled labor are starting to take a toll on the building industry.

“We’re seeing total costs increase at a rate of 8 to 10 percent per quarter,” points out Bryant. “We think that is all attributable to the availability of skilled labor. We are struggling more and more with finding capable contractors to perform the work. And even when we do, there are instances where there’s a level of risk with subcontractors where they simply can’t perform the work because of the volume they’ve taken on. We’ve started to require performance bonds from subcontractors because we’ve had people walk off jobs.”

Bryant says many clients are starting to get nervous about this dual problem of rising construction costs and a scarcity of labor. “We’re hearing that a lot of these deals are dangerously close to just flat-out not happening as a result of the hyped-up demand and the corresponding cost for construction.”

Anthem Memory Care, a Lake Oswego, Oregon-based developer/owner and operator with communities in Illinois, Colorado, Kansas and California, is targeting ground-up construction in its growth model, while remaining bearish on acquisitions. According to Isaac Scott, principal at Anthem Memory Care, the company expects to build between three and four projects in 2018 and 2019.

Anthem delivered five buildings in 2016: three new ground-up construction projects and two acquisitions. “One of the reasons we pulled back this year is construction pricing and the availability of good subcontractors,” says Scott.

While the health of seniors construction may continue to be a tale of many markets, each is reeling from the brunt of higher costs and fewer workers.

“Sites that used to be strong markets in 2011 and 2012 are no longer strong markets for us,” says Scott. “It has a lot to do with construction pricing. It’s very easy for a developer to quickly justify construction pricing increases by just turning up his rent, but frankly we’ve stayed disciplined not to do that. I think the financing world is going to limit growth.”

According to the Bureau of Labor Statistics, the total number of jobs in construction occupations is projected to rise from 6.5 million in 2014 to 7.2 million in 2024, a 10 percent increase.

Many concur that after an exodus of labor during the recession, workers never came back to the field. Bryant says that some savvy subcontractors are creating in-house mentoring and apprenticeship programs to bring youth into the trade, even posting recruitment billboards in Florida’s major metros.

But not just any people. Contractors and subcontractors, and developers and architects for that matter, base much of their success on relationships and integrity.

“Protecting our reputation and developing relationships is huge for us,” says Chuck Taylor, director of operations for Lemont, Ill.-based Englewood Construction. The company is engaged in several seniors housing renovation projects.

“We work on being fair in pricing and being transparent. You hear that word thrown around a lot, but it is so important to be transparent,” emphasizes Taylor. “We try to focus not only on relationships with developers and architects, but relationships with subcontractors and to treat them well. As a construction manager and general contractor, our reputation is only as good as our weakest subcontractor.”